Risks Of Different Investments
There are various types of investments to choose from, and each has its own risk associated with them. For example, U.S. Treasury bonds would be considered low-risk investments since they’re guaranteed by the U.S. government if held until their expiration date or maturity.
Going back to our example, if the homeowner decides to invest their money in the market instead of paying off the mortgage ten years early, there’s a risk that some or all of that money could be lost. As a result, if the investment loses money, the homeowner would still need to make ten years’ worth of loan payments.
Should You Split Mortgage Payments Equally
By Romana King on December 28, 2016
You may discuss what mortgage works best for your combined budget, but not the awkward details, like whether or not to split the payment equally
As a couple, you took a big leap: You bought a place and moved in together. Now you spend hours discussing where to buy the perfect couch or the right type of dining room table for your space. But how much time have you spent discussing how to split mortgage payments?
While couples will often discuss what mortgage will work for their combined budget, they dont always discuss the awkward details, like how much each person should actually pay. And believe it or not, not all couples split the mortgage payments equally.
To help you and your partner find the right answer to this question, Bruce Sellery offers some insight.
Biweekly Vs Monthly Mortgage Payments
Paying biweekly can save you thousands of dollars in interest and shorten your loan repayment period by several years.
The table below shows how much time and money you can potentially save by opting for biweekly mortgage payments vs. monthly mortgage payments. The example assumes a mortgage balance of $200,000 with a 30-year term and an APR of 4%.
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How To Split & Categorize Each Month
To accurately keep track of principal, interest, and escrows with Stessa, follow these simple steps once per month, making sure all are categorized as expenses :
Use the Split feature to break your mortgage payment into each of its component parts, based on the schedule you’ll create below.
Categorize the principal amount as “Mortgages & Loans > Mortgage Principal”
Categorize the interest amount as “Mortgages & Loans > Mortgage Interest”
Categorize the PMI escrow amount as “Transfers > PMI Escrows”
Categorize the Insurance escrow amount as “Transfers > Insurance Escrows”
Categorize the Property Tax escrow amount as “Transfers > Property Tax Escrows”
Categorize the HOA Dues escrow amount as “Transfers > HOA Escrows”
Through Your Mortgage Servicer
Check your mortgage servicers website for information about biweekly payment options. They may require you to be one month ahead on your mortgage before enrolling in a biweekly payment plan.
On top of that, your loan servicers plan may not even apply the payments to your account every two weeks. For example, Caliber Home Loans states that the only benefit of enrolling in a biweekly payment program is that your 13th and 26th payments each year will be applied to your principal balance, reducing what you owe faster.
Whats worse, trusting these third parties with your money sets you up to get scammed and fall behind on your mortgage.
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Paying Your Mortgage Every Two Weeks
If you really want to boost your mortgage payoff, consider paying every two weeks. In that case, youd make $1,000 payments 26 times per year that adds up to $26,000 by the end of the year. This means youd be making what amounts to an extra mortgage payment each year.
Paying your mortgage biweekly can help you get ahead on your mortgage. It also means that during two months out of the year youll be making 1.5 times your monthly payment, so be sure your budget can handle it. You dont want to have to raid your emergency savings account or go into credit card debt to cover your other basic living expenses just to pay your mortgage off faster.
How Biweekly Mortgage Payments Work
When you pay your mortgage biweekly, you pay half of your monthly principal and interest every two weeks. This means that youll make 26 payments per year the equivalent of 13 monthly payments. So, if you normally make 12 payments of $2,000 each every year, youd instead switch to making 26 payments of $1,000 each.
If your lender immediately applies each payment, youll pay down your principal significantly faster, which means youll accumulate less interest.
Some lenders dont accept partial payments, so your lender might not apply your biweekly payments as you make them. Instead, theyll apply them once a month.
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How The Math Works
If the math is a little tough to follow, it works like this: Biweekly payments are equal to 13 monthly payments in a year where making traditional monthly payments are equal to 12 payments each year.
But do you have to make biweekly payments to do that? You could divide the amount of one month’s payment by 12 and add that amount to your monthly mortgage payment.
If you’re paying $1,500 per month, divide 1,500 by 12 and make your monthly payment $1625. Talk to your mortgage company first to make sure there isn’t something more you have to do to make sure it is applied to the principal amount of your loan.
Biweekly Mortgage Payments: Do They Make Sense For You
Biweekly payments can help you save money by paying extra principal throughout the year.
Edited byChris JenningsUpdated April 25, 2022
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
Paying your mortgage biweekly is a strategy that can reduce your principal balance faster and cut your total interest costs, allowing you to own your home debt-free sooner. However, it might not be as effective as you think because of how mortgage servicers can handle extra payments.
Heres what you need to know about biweekly mortgage payments:
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Why Should You Make Biweekly Mortgage Payments
Anytime you can pay a little extra to lower your principal, youll owe less interest going forward, explains Glenn Brunker, a mortgage executive with Ally Home. Plus, as you pay down the principal balance, less of your payment will go to interest, and more will go toward the principal lowering it even more.
The caveat is that youll need to ensure that extra payment is actually being applied to the loan principal and not the interest.
Lets say you have a 30-year, fixed-rate mortgage for $250,000 with a 3.2 percent interest rate. Your monthly payment would come to $1,081. Assuming you pay once a month, youd pay roughly $139,260 in interest over 30 years.
In the same scenario making biweekly payments or about $540 every two weeks youd cut your total interest down to $119,369, saving you more than $19,800. Youd also pay off the loan in 26 years, instead of 30.
Another reason to make that extra payment is to build equity faster. You can borrow against your homes equity for a variety of purposes and in different ways, such as with a cash-out refinance, home equity loan or home equity line of credit .
Aside from saving you money and attaining more equity sooner, it can make sense to make biweekly payments if you earn biweekly paychecks, Brunker says, noting that an adjusted payment schedule may better align with monthly cash flow.
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Why Using A Separate Bank Account For Your Mortgage Saves You Stress
Your mortgage payment is likely the largest bill you need to pay each month. And if you like your house and credit score, paying your mortgage on time is important.
Using a separate bank account for your mortgage keeps the money away from your regular spending money. You wont accidentally spend your mortgage money if its not in your everyday spending account.
Refinance To A Shorter Loan Term
Best if: Refinancing will substantially lower your interest rate
Refinancing to a shorter loan term only makes financial sense if your interest rate savings will exceed the closing costs for your new loan. The fewer months itll take for you to gain this benefit, the better, but your breakeven point should definitely be sooner than when you expect to sell your home.
If youre ready to refinance, Credible makes the whole process easy. You can compare multiple lenders and see prequalified refinance rates in as little as three minutes without leaving our platform.
Find out if refinancing is right for you
- Actual rates from multiple lenders In 3 minutes, get actual prequalified rates without impacting your credit score.
- Smart technology We streamline the questions you need to answer and automate the document upload process.
- End-to-end experience Complete the entire origination process from rate comparison up to closing, all on Credible.
How A Mortgage Loan Works
A mortgage is a loan to a borrower for the purchase of a property or home. When all of the legal documents are signed during the mortgage closing, the borrower signs the loan documents and agrees to repay the mortgage lender in monthly payments until the loan is paid off.
Typically, the loan term is 15-30 years. In return, the financial institution pays the seller the full price of the home and, in exchange, charges the borrower interest on the loan balance.
How To Set Up A Biweekly Mortgage Payment Plan
If your lender allows biweekly payments and applies the extra payments directly to your principal, you can simply send half your mortgage payment every two weeks. If your monthly payment is $2,000, for instance, you can send $1,000 biweekly.
In general, you wont need to involve your lender in order to start making payments this way, according to David Reischer, attorney and CEO of LegalAdvice.com.
It is simply unnecessary to involve the lender in changing the loan terms so that a borrower must make a payment every two weeks instead of the normal payment due once a month, explains Reischer. If a borrower wants to make an extra payment to accrue the benefit of a biweekly mortgage plan, then they can simply send a payment every two weeks instead of the payment due every 30 days.
You can also divide your monthly payment by 12 and park that amount in a savings account each month, then send the accumulated amount to your lender as an extra payment at the end of the year.
No matter how you do it, Heintz says you should be sure to make it absolutely clear that this entire amount goes toward your principal balance. Otherwise, your lender might return the extra amount or forward it to your next payment, which negates the goal of biweekly payments.
To confirm your biweekly mortgage payment plan works the way you intend it to, make sure that:
In addition, make sure your lender confirms any extra payments are being applied to the principal in a timely manner.
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Benefits Of Paying Your Mortgage More Often
If you can get this system to work for you, not only can you save on interest, but you might also see a bit of a tax break if you claim mortgage interest as a deduction. You should talk to a licensed accountant to see what impact more frequent mortgage payments can have on your tax situation.
And, of course, if you choose to pay every two weeks, you can pay your mortgage off earlier by making an extra full payment per year. Over a 30-year mortgage, thats 30 extra payments, totaling 2.5 years off the end of your loan.
How Does Paying Your Mortgage Biweekly Work
Interest on mortgage loans is typically calculated on a monthly basis. This means that the lower your principal balance, the lower the interest charged will be.
By paying biweekly, youll reduce your principal balance just a little bit extra, prior to that monthly interest being calculated. These savings will add up month after month, not only reducing your total mortgage interest, but also paying off your loan sooner.
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What You Should Look For
In order for the homeowner to build equity in their home at a faster pace, the homeowner must have a lender that will credit half of the monthly payment immediately. If the lender waits until the next payment has been received before crediting it to the loan’s principal, the homeowner will not see the full benefit. Many lenders decide to hold partial payments in an account until the rest of it is received. This is the case in which the homeowner will not benefit from half payments.
Many companies will make the offer to convert a mortgage to a bi-weekly payment plan with a fee. The lender will automatically withdraw the payments from the homeowners bank account every two weeks. It is important to read the small print associated with this. Many of them only pay the lender once every month, so that extra payment doesnt get applied to the loan until the end of the year. In the meantime, the company earns interest on the homeowners money in addition to charging the homeowner a fee that can seem high at times.
The bi-monthly mortgage can be something to watch out for because it is not the same as the bi-weekly mortgage. A bi-monthly mortgage does not have the same results as a bi-weekly one because the homeowner pays half of the monthly mortgage twice instead of every two weeks. This means an extra payment is not made. There is a difference between saving only a single months interest instead of seven years interest.
Can I Get A Guarantor To Secure The Split Loan
Yes, . Generally, with the help of a guarantor, lenders allow you to borrow 100% , even 105% to cover additional costs such as government stamp duty.
Most lenders even waive the requirement for if you have a guarantor.
Our mortgage brokers are guarantor home loan experts. They can help you find a suitable lender that can meet your home loan and financial needs from our panel of .
Call us on 1300 889 743 or complete our to find out if you qualify.
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How To Change To Biweekly Mortgage Payments
Some lenders have to grant permission before you can switch to biweekly payments. If approved, there are two things to keep in mind. First, your biweekly payments won’t be applied to your account until you’ve reached your full monthly payment amount. Also, during your first month of enrollment, youll likely need to pay both your regular monthly payment plus your two half payments.
Some lenders charge fees to change payment agreements, while others do not. When you talk to your lender, find out if fees are associated with making the switch.
If your lender does not agree to the biweekly payment terms that you propose, simply pay extra every month to get the same benefits. You can also save up and make an extra payment every year, rather than every month. When you make any kind of extra mortgage payment, make sure it’s being applied to your loan principal rather than the interest.
Its important to note that certain mortgages don’t permit early payoffs. When early payoffs aren’t allowed, lenders may charge fees known as prepayment penalties. These fees may equal the amount of interest youre eliminating. If you aren’t sure if your mortgage allows early payoffs, look over your contract or talk to your lender.
What Does The Fixed Portion Offer
A fixed rate allows you to lock in your home loan for a certain period of time, usually , and . During the fixed period, the interest rate on the loan will remain the same in spite of any changes made to the official cash rate by the RBA.
For example, if you fix a $300,000 loan for 3 years, the interest rate on your loan will not be affected by any interest rate fluctuation over the next three years.
When the fixed term ends, the interest rate reverts back to a variable rate.
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